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March 4th Weekly Recap

Weekly Summary Report

March 4, 2016
By Jordan Wirsz

Today, big news was released that 242,000 jobs were created in February, a big jump from the 190,000 that most economists were expecting. Unemployment remained at 4.9%, with approximately 90 million people not working…

Did you catch that? Yes, 90 million people are estimated to unemployed including those not in the workforce. That is a staggering, and scary number to comprehend.

As we’ve been saying, real inflation has remained incredibly low while many asset classes have deflated pretty substantially. Wage inflation was measured year over year at 2.2% in February, down from 2.5% in January. Overall, I would say it is still positive to have 2%+ wage inflation. There are still a few flies in the ointment that cause a little bit of concern. We had the dip in wages in the month, which is presumably a payback for gains in January. We had a drop in the workweek that was a little bit negative. Hours worked declined by 0.2 to 34.4 hours in February.

The combination of no real inflation and having some wage inflation should actually be relatively positive for the economy. More money to spend, and the same cost of goods. Although 2.2-2.5% wage growth isn’t out of this world high, it is still positive in my mind. We are not in stagflation with wages, and certainly not deflating in wages. Overall, I view this jobs report as a net positive, with one caveat… The possibility that the Fed sees things doing well enough to put rate hikes back on the table in the near term. The Fed keeps touting a future forecast of inflation, as seen in the chart below indicating a rebound in inflation “expectation”. This is most certainly a positive thing, although presently there is little sign of any real inflation of which to speak.

With stock market rising, it is entirely possible that the “feel good” factor has taken over and the big institutional money may re-enter the market, driving the indexes even higher. That process would make it even easier for the Fed to justify another rate hike in June. My bet still remains that we will see a single rate hike this year, with the possibility of two. I will be very surprised if we see three, unless things really turn around on a global scale. For example, take a look at the U.K. Services PMI reading, an example of continued global weakness:

Brazil is having an especially difficult time right now:

In fact, Brazil’s current recession dwarfs what the 2008/2009 recession here in the U.S. with lack of GDP growth:

JPM has an interest chart reflecting the global economic condition:

JPM has an interest chart reflecting the global economic condition:

As I indicated a couple of weeks ago, although the global economies are having terrible difficulties, the U.S. is still “the best of the worst.” It was only weeks ago that the world was considering the possibility of negative rates here in the U.S. Now with today’s jobs report, that is all but a forgotten topic. Many institutional researchers around the globe are telling people to stay away from the financial services sectors, including and especially banking. But the reality is, banks are probably in one of the best positions they have ever been in to sustain an economic downturn.

Net excess reserves are near cycle highs:

This means two things:

It means that banks still are not lending to capacity – which means that when they feel comfortable, they’ll lend more, which will boost the economy, especially real estate; and

Banks are “comfortable” where they are, and a recession or slowdown is not likely to throw them into peril territory.

Warren Buffet had it right when he bailed out Wells Fargo in the Great Recession, and he’s made billions from it. Although the financial services sectors may be subdued over the next year or two, I am relatively bullish on banking overall…Especially if Trump does win the election this fall, which will mean less future regulation, and more lending which will equal bigger profits for banks in the coming years of the bullish economic cycle.

Now on to the energy sector:

Today, oil is on a tear…The May futures trading at $37.70 as I write this. It’s incredible really, considering the percentage gain from the bottom sub $30 only a few short weeks ago. At this point, I’m willing to put my analysis on the line for scrutiny by saying that I believe the price of oil has bottomed. That is NOT to say that we won’t trade down near the lows again, but I don’t think the price will go any lower on a relative basis. I see this little rally that we’re having now as an opportunity to take a quick trading opportunity to short the futures and make a buck…but the overall over supply problem persists. They say, “a picture says a thousand words” so here are several thousand words:

I am starting to get bullish on the energy sector…Not that I think it will skyrocket anytime soon, but that I think its time to start picking the stocks you’ll want to buy in the coming quarter. There is a lot of blood starting to roll down the streets of the energy sector, and if you are a long-term investor, there are some great opportunities to be had during this period of time if you are patient. Well worth considering, I believe.

Election Year Volatility
Many talking heads on TV love to talk about election year jitters. I have a really hard time understanding why people bet so much on the speculation of a coming president being positive or negative. I tend to believe that election years will be volatile for that very reason, but I also believe the current administration will do all that they can to make the numbers look better than they really are. Hence, why I don’t put too much stock in today’s employment numbers. I would venture to guess that they’ll be revised down later…Or, maybe not, depending on how bad the current administration wants to hide the true state of the economy given their policies. Conspiracy theories and politics aside, this year is no doubt set up to be a volatile one.

Real Estate continues to be my favored asset class for the next number of years. Truly, we have a long way to go up from here, minor temporary setbacks aside. Residential construction spending has slowly grown, but we are far off of the last “boom” market highs:

Total construction spending, however, is up near pre-recession highs. I believe this to be the case due to massive multi-family building all over the country, which are usually huge dollar projects. Additionally, casino construction spending is up, as gaming and hotel operators here in Las Vegas are learning that shows, shopping and other activities are bringing in the crowds much more than gaming is. Gaming, unfortunately for them, is less of the attraction to Las Vegas. So instead of building massive gaming floors, casinos are investing in other (expensive) non-gaming attractions.

I believe that much of this construction spending is public infrastructure, multi-family, and other niche uses, leaving residential and commercial construction still in the running for greater growth. My mantra: “Buy more quality real estate at good values.”

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